Initial coin offering (ICO) is a usually unregulated means of crowdfunding with the use of cryptocurrency, which can be a capital source for startup companies.
Let’s delve into it in more detail:
Suppose you are CEO of a young startup which makes an app X. Your app has gained some real traction in the market over the past few months, and now you’re looking to raise some money for accelerating your growth (growth hacking) and hiring more workforce. You can go for VCs, angel investors or do a campaign on Kickstarter which can be all be a tad difficult. The other option is an ICO.
In an ICO a percentage of the newly issued cryptocurrency is sold to investors in exchange for legal tender or other cryptocurrencies such as Bitcoin. The term might be undifferentiated from with ‘token sale’ or crowdsale, which alludes to a technique for offering support in an economy, giving speculators access to the highlights of a specific task beginning at a later date.
During the ICO campaign, enthusiasts and supporters of the firm’s initiative buy some of the distributed cryptocoins with fiat or virtual currency. These coins or tokens are similar to shares of a company sold to investors in an Initial Public Offering (IPO) transaction. If the money raised does not meet the minimum funds required by the firm, the money is returned to the backers, and the ICO is deemed unsuccessful. If the funds requirements are met within the specified timeframe, the money raised is used to either initiate the new scheme or to complete it.
The first token sale (also known as an ICO) was held by Mastercoin in July 2013. Ethereum raised money with a token sale in 2014. ICOs can be very effective, but adequately challenging to execute. ICOs need to prove their credibility to the world that they can deliver on what they are saying in their white paper. A white paper is like their pitch deck in form of a web page putting out details like daily active users, revenue, user acquisition strategy, what they intend to do with the money etc. in front of everyone who is interested in participating in their ICO.
Important Note: Although there are successful ICO transactions on record, investors are cautioned to be wary as some ICO or crowdsale campaigns can actually be fraudulent. Because these fundraising operatives are not regulated by financial authorities such as the Securities Exchange Commission (SEC), funds that are lost due to fraudulent initiatives may never be recovered. We at Coin News advise investors to invest with caution.